July 10, 2012 in Business

Borrowing rises in May

Credit card use for month hits pre-recession high
Martin Crutsinger Associated Press
 
What this means

 More borrowing is generally viewed as a healthy sign for the economy. It suggests consumers are gaining confidence and are more comfortable taking on debt.

 But it can also mean that more people are having trouble finding jobs and deciding to go back to school.

WASHINGTON – Americans put more on their credit cards in May than in any single month since November 2007, one month before the recession began.

But overall credit card use is still well below where it was just before the downturn. Economists say May’s increase was likely a temporary response to weaker hiring and poor wage growth and not a sign of sustained confidence in the economy.

“We might see additional increases in credit card debt in the coming months,” said Paul Edelstein, director of consumer financial economics at IHS Global Insight. “But they won’t match the May surge.”

Consumer borrowing rose by $17.1 billion in May from April, the Federal Reserve said Monday. The gain drove total borrowing to a seasonally adjusted $2.57 trillion, nearly matching the all-time high reached in July 2008.

Borrowing has increased steadily over the past two years. But most of the gains have been driven by auto and student loans, which rose to a record level of $1.7 trillion in May.

Consumers cut back sharply on credit card debt during the recession and immediately after. Only in the past year have they started to put more on their credit cards, and the gains have mostly been modest.

That changed in May when the measure of credit card debt jumped by $8 billion. Still, the level of debt for that category increased to only $870 billion, or 2.2 percent above the post-recession low hit in April 2011. The category had totaled more than $1 trillion before and shortly after the recession began.

And consumers reached for their credit cards more often during a tough stretch for the economy. The job market slumped. Consumer confidence fell. And wages and salaries, which have barely kept up with inflation in the past year, stayed flat.

“It is possible that households are relying more and more on credit cards to cover everyday expenses, given that job and income growth are so weak,” Edelstein said.

Joel Naroff, chief economist at Naroff Economic Advisors, said growth in consumer credit is still being held back by the weak gains in income.

The Federal Reserve’s borrowing report covers auto loans, student loans and credit cards. It excludes mortgages, home equity loans and other loans tied to real estate.

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